Sunday, May 29, 2022
A different Jubilee story - 70 years of roaring house prices
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission.

There is a war on, and inflation has risen to uncomfortably high levels, having gone from less than 2 per cent to more than 10 per cent in the space of a couple of years. Households feel badly squeezed and are having to penny-pinch to make ends meet. People were looking forward to the sunlit uplands, but times are very tough.

This is not, though it could easily be, a description of where we are now but of the economy at the start of the Queen’s reign, in 1952. The war was in Korea and 60,000 British troops were involved, 1,100 of whom lost their lives, alongside 37,000 US troop losses and 227,000 South Korean deaths.

As we mark the Queen’s Platinum Jubilee, a length of a reign which will surely never be repeated, the economics of that 70-year period are fascinating. In 1952, according to modelled estimates of the current consumer prices index (CPI) by official statisticians, inflation peaked early in the year at just over 12 per cent, though ended the year below 7 per cent and during 1954, after the end of eh Korean War, dropped below 1 per cent. The Treasury and Bank of England would love a repeat performance now.

The Queen’s reign has been bookended by high inflation, and inflation has also in many ways been the story of her reign. For a long time, the UK was thought to be the most inflation-prone of the big economies. Today, with the highest inflation rate in the G7, that label is back, though this time it is to be hoped only temporarily.

Over the 70 years, again on the basis of the CPI, prices overall are more than 18 times what they were in 1952. For inflation, it has been roughly a game of two halves. From 1952 to 1988, consumer price inflation averaged 6.4 per cent. Since 1989, the average has been 2.5 per cent. That includes the period since Bank of England independence in 1997 in which the average, despite the current surge, is still clinging on to 2 per cent.

The difference between the two periods shows the power of compounding. A 6.4 per cent inflation rate, sustained over 35 years, would leave prices at the end roughly nine times where they were at the start. If inflation after the current episode was to settle at 3 or 4 per cent rather than 2 per cent, the implications would be significant.

In the 1950s, people really could enjoy a night out with a ten-shilling note; to remind younger readers, that was the pre-decimal half of £1. But ten shillings then is equivalent, in real terms, to about 2.5p now, and even I would struggle for a night out on that.

You will ask, as you should, what has happened to earnings over this long period when inflation has eroded the purchasing power of money so much. The answer required some statistical detective work since the official series for average earnings only goes back to 2000. But piecing it together using the Bank of England’s millennium of data, I estimate that average weekly earnings were £6.04 in 1952, compared with £605 in the second quarter of this year.

In cash terms, total average pay, admittedly boosted this year by exceptional bonuses, is 100 times what it was. If regular pay, excluding bonuses, is used for the comparison, earnings are more than 90 times what they were. The precise magnitudes can be debated but the broad conclusion is clear; wages have risen a lot faster than prices.

Again, this is a game of not-quite-two-halves. Until the financial crisis struck in 2008, real wage increases, alongside rising productivity, were guaranteed. Since then, neither has been. Real wages are falling quite sharply now on the back of more than decade of stagnation. Wage growth in cash terms, incidentally, was more than 8 per cent in 1952, 29 per cent in 1975 – the peak inflation year – and 22 per cent in 1980, Margaret Thatcher’s first full year in office.

Pay has not, it should be said at this point, kept up with all prices. The Nationwide Building Society’s house price index dates back, thankfully, in 1952. Then the average UK house price was just £1,891. Prices had to be pulled up by earnings. Otherwise, people would now be able to buy a house with a month’s average pay after tax.

The extent of that pull increased over time, however, exacerbated by the greater availability of mortgages and inadequate new housing supply. In the 1950s and 1960s, people did not need mega City salaries to live in some style. Teachers, civil servants and other professionals could do so. Then housing pulled away.

The highest rate of house-price inflation recorded by the Nationwide was 42 per cent during the Barber boom (after the Tory chancellor Anthony Barber) at the end of 1972, though house price inflation reached 32 per cent in the spring of 1979 and early in 1989. That last boom, named for Nigel Lawson, was followed by six years of falling prices, until the mid-1990s.

Even so, the rise in house prices over the period as a whole has been remarkable. The latest average for the Nationwide, £260,771, is 139 times the 1952 level, outstripping other prices and whichever measure of the growth in wages and salaries you choose to use. The Nationwide’s measure of “real”, that is inflation-adjusted, house prices only goes back to 1975 but it estimates that the are 2.4 times what they were then.

The story of the past 70 years is not just about inflation. The period is bookended too by tax, with the tax burden on course to return to the high levels last seen in the late 1940s and early 1950s.

It is a story of economic progress, something we probably take for granted and, because it is incremental, unlike the great surges in inflation, probably do not notice that much. Despite the current squeeze, living standards are much higher than they were. The UK’s gross domestic product, adjusted for inflation, is more than five times what it was in 1952. It has increased by 430 per cent.

Population has also increased, but by a smaller amount. In 1952 it was 50.6 million, compared with the latest official estimate of 67.1 million, a rise of 33 per cent. That is consistent with GDP per capita rising by nearly 300 per cent over the Queen’s rein and being almost four times where it was. John Major once promised to double living standards, measured by GDP per capita, over 25 years. That has never quite been achieved, though it has sometimes come close. A quadrupling over 70 years is not bad.

There have been other big economic changes. The female employment rate, 35 per cent in 1952, is now 72 per cent, though the male employment rate, 79 per cent, is lower than it was, partly due to young people spending longer in education. But that is probably enough for now, and maybe the changing labour market is a topic to return to.